Security Deposit Disputes and Laws

A security deposit
is an advance rental payment that is usually collected by the landlord prior to
or at the time the tenant moves into the property. The purpose of security
deposits is to protect the landlord in case the tenant damages the property.

The security deposit will cover the costs of excessive repairs to the unit
after the tenant moves out. Landlords
cannot deduct money for security deposits for normal wear and tear. Most states have strict guidelines as to how
and when landlords must return security deposits. Typically landlords must
return security deposits within 14 to 30 days after the tenant vacates the
premises. Landlords are subject to strict penalties if they violate these laws.

Limits on Security Deposit Amounts

Most cities have
limits on the amount of security deposit a landlord can collect. The general
rule of thumb is not more than two months rent as a security deposit. This
limit is reduced to one month's rent if a tenant is 62 years of age or older in
some cities that have senior rent control laws.
If the property is furnished, then not more than three months rent can
be collected in advance. Also, pet deposits may be required to be included as
part of the security deposits. Some cities do not allow an additional amount
for pet deposits. You need to check your city rent laws.

Charging Last Month’s Rent

Most often, it is
not legal to charge more than two months rent at any one time, so it can be
designated first and last or first month and security. Generally the landlord
cannot charge, first month, last month and a security deposit unless the unit
is furnished, then the landlord can charge up to three months rent. A security
deposit cannot be used towards a last month rent so if you pay the first month
rent and a security deposit, you will need to pay your last month rent and wait
for the landlord to return your security deposit unless you and the landlord negotiate otherwise.

Increasing the Deposits

If the rent has
increased, the landlord can also increase the security deposit to equal the
same amount as the rental increase.

Interest on Deposits

Landlords do not
have to pay interest on deposits, but they do need to deposit the money in a
trust account separate from the general and personal funds. If they do agree to pay interest, it must be
at least the same amount as an average commercial bank or savings loan pays
their depositors on savings accounts determined and published by the Banking
Commissioner. Some cities require that interest
must be paid annually on the anniversary date of the tenancy either directly to
tenants or as a credit towards the tenant’s next month's rent.

Nonrefundable Deposits

Landlords/owners may
collect nonrefundable lease option payments from tenants/buyers if the tenant
has negotiated a lease option to purchase the property at a later date. A landlord may also collect a nonrefundable
cleaning fee. Nonrefundable deposits must be distinguished in writing in the
lease separate from security deposits. Nonrefundable security deposits are
against the law.

Deposits When Rental Property is
Sold

If the building is
sold, the landlord must return the security deposit or transfer it to the new
owner. Generally it is transferred to the new owner. If neither event happens,
then the old and new landlords are responsible for returning the tenant’s
deposit.